Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
Chapter 9. Billions Served
Neither a borrower nor a lender be;
For loan oft loses both itself and friend.
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man. – Hamlet I.iii.79–841
In the last seven chapters, we have examined microfinance from more angles than ever before in
one place. We have placed modern it in the flow of history. We have shared the points of view of
the user at the metaphorical teller window and the manager behind it. We have surveyed the
diversity of modern microfinance. And we have taken seriously the strongest claims for its
virtues, investigating each in turn: microfinance as ender of poverty, enhancer of freedom,
builder of industry. It is time to sum up, draw lessons, ponder what lies ahead, and advise how to
influence it.
You know the popular image of microfinance: it was invented by that guy in India who
won the Nobel Prize; it gives loans so people can start businesses and lift themselves out of
poverty. The job of part I of this book was to peel back that image in order to discover a more
credible and complex story. Modern microfinance is not, as a cynic might have it, merely another
foreign aid fad foisted upon the poor, doomed by its naiveté to fail. If it is a fad, then it is the
longest in the history of overseas charity. What explains its persistence is its remarkable success
on the market test: poor people are willing to pay for reliable financial services. And that says
something about its value. Thus microfinance is best seen as arising organically from several
sources: the real needs of poor people for tools to manage tumultuous financial lives; a long
historical process of experimentation with ways to deliver such tools; the creativity, vision, and
1
“Husbandry” might be “economy” in modern English.
1
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
commitment of the pioneers such as Muhammad Yunus; and the business imperatives of mass
producing small-scale financial services.
The scene having been set by part I, part II delved into the evidence on microfinance’s
role in development. It tried, in the words of my colleague Ethan Kapstein, to be critical but not
cynical, to give the most serious defenses of microfinance a full airing. In writing it, I realized
that I needed to look the question of impact from several distinct conceptions of “development,”
each tending to lead to different kinds of evidence. Randomized impact studies have rightly
received much attention, but have not told the full story any more than a randomized trial of
mortgages would have told us what we need to know about the impact of the mortgage industry.
That lesson about methodology goes well beyond microfinance.
As for microfinance, the lessons distill to these:

Credible evidence on microfinance’s success in development as escape from poverty is
scarce. At this writing, essentially two credible studies of microcredit and one of
microsavings are in the public domain. The two of credit found no impact on indicators of
household welfare such as income, spending, and school attendance after 15–18 months. But
the celebrated sequence from credit to enterprise is more than a myth. The study of group
credit in Hyderabad, India, spotted an increase in profits among the minority (31 percent) of
households that already had a business, as well as more business starts among households of
relative education and wealth.2 Meanwhile the randomized study of a commitment savings
account in Kenya found that this service too helped existing business owners invest in their
enterprises. And here, unlike with microcredit, the boost to entrepreneurship showed up as
improvements in poverty indicators such as income and spending.

2
The evidence on whether microcredit in particular spurs development as freedom, that is,
Banerjee et al. (2009), 17.
2
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
strengthens the tenuous control of the poor over their life circumstances, is ambiguous.
Financial services inherently enhance agency but not automatically. Poor people whose
incomes are volatile, whose health is frailer, and who can’t work when injured or sick need
financial services more than the global rich, in order to put aside money in good days and
seasons and pull it out in bad. Loans, savings accounts, insurance, even money transfers can
help them do this. But credit inevitably entraps some people through ill luck or judgment.
Researchers who have spent weeks or years with borrowers have collected many happy
stories of women of finding liberation by doing financial business in public spaces. Others
have returned with disturbing stories—some mild, as of the women made to sit in meeting till
all dues are paid, some more serious, as of the women whose roofs are taken by peers in
order to pay off their debts. These contradictions are not hard to understand, for credit is both
a source of possibilities and a bond. Overall, it is hard to feel sanguine that stories of
empowerment are the whole story.

The success on which microfinance can stake its strongest claim is in industry building. With
time, the microfinance industry is growing larger, more efficient, generally more
competitive, more diverse in its offerings. More institutions are becoming national
intermediaries, taking deposits and lending domestically. In few realms can foreign aid and
philanthropy point to such success in building industries. But this success still leaves scope
for critique. The enthusiastic supply of credit for microcredit from socially motivated
investors public and private is distorting the industry: undermining the drive to take savings
and spurring unwise lending, even bubbles. Enthusiasm for credit appears inherently
destabilizing in competitive markets, where microfinance institutions can grow fastest by
poaching each other’s clients, leading people to take several loans at once, and where no
3
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
credit bureau gives MFIs the full picture.
Overall the great strength and hope of microfinance lies in building self-sufficient
institutions that can give billions of poor people an increment of control over their lives, control
they will use to put food on the table more regularly, invest in education, and, yes, start tiny
businesses.
Because poor people are willing to pay for the services, microfinance institutions can
serve many from a modest base of charitable funds. The benefits may be modest compared to the
expectations of escape from poverty, but the costs can be modest too. Rich Rosenberg once
recalled his oversight while at the U.S. Agency for International Development of “a few million
dollars of donor subsidies in the mid-1990s” for Bolivia’s Prodem, which became the
microfinance bank BancoSol and now serves 130,000 borrowers and 323,000 savers.3 He
diagrammed the “value proposition” of microfinance this way:
Small one-time subsidies
leverage large multiples of unsubsidized funds
producing sustainable delivery year after year of highly valued services
that help hundreds of millions of people
keep their consumption stable, finance major expenses, and cope with shocks
despite incomes that are low, irregular, and unreliable.4
The Effects of Causes
A big idea in the closing chapter of part I (chapter 5) is that microfinance as we observe it is the
outcome of an evolutionary process. “Natural” selection explains the emphases on credit, groups,
and women. The evolutionary perspective also explains a trait little noted in chapter 5: the
mythology that promoters have woven around the workaday business of disbursing and
collecting loans, what Pankaj Jain and Mick Moore called the “orthodox fallacy.” Almost no
development project has held such strong and multidimensional appeal as microcredit. It appeals
3
4
[MIX market]
Rosenberg (2010), 5.
4
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
to the left with talk of empowering women and to the right by insisting on individual
responsibility. As the cliché goes, it offers a hand, not a hand-out. And because the currency of
microcredit is currency itself, not textbooks or trainers, supporters feel that what they
contribute—money—goes directly to the poor. To this extent, the intermediary disappears in the
mind of the giver, creating a stronger sense of connection to the ultimate recipient. Peer-to-peer
lending sites such as Kiva use the Internet to strengthen this psychological bond by posting
borrowers’ stories and pictures.
Just as it hardly matters from the evolutionary point of view whether joint liability was
invented or copied in the 1970s, it hardly matters whether microfinance promoters believe the
mythology. What matters is that investors—again, understood broadly to include all who provide
finance for microfinance—rewarded those who told certain stories, creating a selective
environment that favored the promoters best at telling them. This should not surprise. All of us
who believe in our work tell the best stories we can to show how we believe we help. Jain and
Moore put it well:
We are not suggesting here that the leaders of the big [microfinance institutions (MFIs)]
perpetrated some kind of fraud….The picture is far more complex than that and notions of blame
or of individual responsibility are irrelevant to our objective of obtaining practical understanding
of why and how [MFIs] have been so successful. Our limited evidence suggests that the orthodox
fallacy blossomed and spread in large part because that is what people in aid agencies wanted to
hear, thought they had heard, or asked [MFI] leaders to talk about and publicise. To the extent
that [MFI] leaders did foster a particular image, this could be seen simply as targeted product
promotion in a “market” of aid abundance…
…to justify the continuing flow of that money to their own particular organisations and to
the microfinance sector as a whole, [MFI] leaders and spokespersons have gradually found
themselves, through a combination of circumstances and pressures, purveying a misleading
interpretation of the reasons for their success. They emphasise a few elements in a complex
organisational system, and are silent on many key components.5
Perhaps the mythologizing of microfinance was historically necessary to build support
for the good cause of delivering useful financial services to billions. But in addition to being
5
Jain and Moore (2003), 28–29.
5
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
largely wrong, the mythology has also damaged the microfinance movement, making it harder
for microfinance to live up to its actual potential for good. It has amplified the emphasis in favor
of one service, microcredit, delivered in ways conceived at one time, about three decades ago.
The mythology has spread the dangerous idea that investing in microcredit, putting the poor in
debt on a large scale, is automatically good for the poor. In 2004, for example, the U.S. Congress
acceded to lobbying from U.S. microfinance groups to require that half of all U.S. microfinance
aid go to “very poor” people, despite the lack of evidence that the poorest wanted and could
safely handle such credit.6 The acceleration of funding for microcredit, effectively predicated on
the idea that more is always better, is also a core cause of the debacles in India and elsewhere,
which now haunt the movement. Especially since high-quality studies have emerged that
contradict the high-flying myth, the public standing of microfinance may dive, like Icarus after
he flew too close to the sun.
This book is an attempt to develop a more honest story of microfinance, so that Icarus
will neither fly too close to the sun nor brush the waves, and so that the movement will realize its
fullest potential to serve the poor. How well it and other efforts to bring realism to this business
will succeed depends on how much the supporters of microfinance change their behavior. If
people continue to channel billions to the best storytellers, they will continue to create
contortions and distortions in the very things they mean to support.
You can’t have it all
Economics is sometimes defined as the study of the optimal allocation of scarce resources.
Really there is more to it than that—resources are rarely allocated optimally anyway—but the
definition is apt in that dismal scientists often think in trade-offs. Rejiggering a factory to alter
The law defined “very poor” as less living on less than $1,000 per annum in Europe and Eurasia in 1995 dollars,
under $400 in Latin America, and under $300 elsewhere. U.S. Congress, Microenterprise Results and Accountability
Act of 2004, Public Law 108–484, §252(c).
6
6
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
the allocation of labor and capital produces more toasters and fewer microwaves. Part II
reviewed microfinance in light of each of the three notions of success. But that sequential
analysis is only an input to a broader synthesis, and to the judgment necessary for wise action.
Having built our evidence base by scoring microfinance against various standards, we now need
to think across them, and here it is helpful think in terms of trade-offs.
Microfinance vs. everything else
Trade-offs await on two levels: in comparing microfinance to other charitable projects, and in
comparing styles of microfinance. On that first, broad level, is seated the grand question of this
book: Does microfinance deserve all that praise and funding? Or should supporters channel their
charity and aid elsewhere?
Since there’s not much evidence that microfinance lifts people from poverty, or even
reliably empowers them, it might seem sensible for funders and investors to dump it and move
on to something that puts a bigger dent in poverty. But it turns out that microfinance is not
unusual in the degree of our ignorance about its impacts. The impacts of building clinics or
distributing bed nets or teaching women business skills are equally variegated, uncertain, and
poorly studied. So limited evidence is not a strong argument against microfinance and for other
activities.
I think that financial services for the poor do deserve a place in the world’s aid and social
investment portfolios, for two reasons. First, microfinance has compiled impressive
achievements in building institutions that enhance the freedom of millions, and could do the
same for billions. These achievements come with the caveats already noted, but because
microcredit is generally safe in moderation, and because microfinance is more than microcredit,
the caveats are not fatal. Second, a principle of diversification applies: given the uncertainties
7
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
about the impacts of microfinance or anything else, and given that poor people need many
things, it is wise to invest in several strategies at once. That said, I will argue below that from the
point of view of delivering appropriate financial services to the poor, microfinance’s slice of aid
and charity—about $3 billion in 2009, as noted in chapter 8—has grown too large. Microfinance
would do better on its own terms if there were less money for it. To this substantial extent, then,
there is no trade-off between microfinance and other kinds of aid. Less money for microcredit
and more for bednets would be a double win.
Microfinance vs. microfinance
Within microfinance, trade-offs are harder to avoid. In the late 1990s specialists hotly debated
the trade-off between serving the poorest and weaning MFIs off subsidies so that they could
grow to serve more people, even if that meant bypassing the poorest, least economical
customers. Economist Jonathan Morduch called the split between the “poverty” and
“sustainability” advocates the “microfinance schism.” Within this breach, however, a seedling of
thought grew that questioned the inevitability of the trade-off: business-like sustainability, the
argument went, need not cost much in depth of outreach to the poorest. Bangladesh was Exhibit
A. True to his training, Morduch doubted that the choices could be dodged so easily.7 With
coauthors, for example, he demonstrated that increasing a microcredit interest rate 1 percent (not
1 percentage point) in Dhaka, the capital of Bangladesh, reduced borrowing by slightly more
than 1 percent on average. The implication: even in Bangladesh, cutting subsidies to an MFI
might make it more self-sufficient, but it would also, by forcing up interest rates, put formal
financial services beyond the reach of some poor people.8
The evidence gathered in this book also hints at trade-offs, especially between
7
8
Morduch (2000).
Dehejia, Montgomery, and Morduch (2009).
8
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
development as freedom and development as institution building. Recall the end of chapter 7:
“On any given day, in any given place, the immediate business interests of the lender conflict
with the agency of the borrower.” MFIs can do credit more easily than savings or insurance, yet
it is credit that by nature curtails freedom more. Imposing constraints on borrowers, such as
through group meetings and weekly payments, protects the MFIs’ bottom line. Higher interest
rates may boost the profitability of MFIs and the dynamism of the industry—and flirt with
“usury.” Inversely, layering non-financial services on top of financial ones may enhance
women’s agency but also takes subsidies.
If it is easy to point out choices, it is harder to make them. The advantages and
disadvantages of building subsidy into microfinance, such as through low-interest loans from
social investors, vary over time and space in unknown ways. Even if we knew exact
consequences, ethical imponderables would raise their heads. How are we to weigh the choice of
making cheaper services available to a smaller group against offering more expensive services to
a larger one?
In the face of such unknowns and imponderables, I suggest two principles of judgment.
First, that a project is mostly likely to achieve its potential when it follows its natural
constructive tendencies. If your daughter were a piano prodigy, you would get her piano lessons.
But note the emphasis on “constructive”: you would probably not nurture her tendency to
sociopathy. By this principle, microfinance is likely to do the most good when it plays to its
strength, namely turning modest amounts of aid into substantial industries that provide reliable
services. Among charitable projects, microfinance is in this respect truly prodigious. To echo the
previous chapter: “There is no Grameen Bank of vaccination. One does not hear of organizations
sprouting like sunflowers in the world of clean water supply, hiring thousands and serving
9
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
millions, turning a profit and wooing investors.” In contrast, client-for-client, microfinance does
not stand head and shoulders above other forms of aid in reaching the poorest, let alone lifting
them out of poverty. The (limited) evidence suggests the contrary, that microcredit is more likely
to help those who already have businesses or who, because they are better off to start with, can
start a business more easily. With respect to Morduch’s “schism,” I therefore favor those who
seek to do microfinance in a self-financing, businesslike way in order to maximize reach.
The second principle of judgment is this: don’t give up hope on dodging trade-offs. The
dictatorship of hard choices is only absolute if microfinance institutions are squeezing every
possible ounce of productivity from the capital and labor they consume, and if technology is
static. But perfectly efficient firms reside only in textbooks and technology is always improving.
Thus the choices in microfinance today are not entirely dismal. The chief opportunity spied by
some of the sharpest observers today, including the Bill & Melinda Gates Foundation, is in doing
savings, perhaps especially through high technology (see below).
Too much credit for microcredit
The financial devices channeling billions into microfinance are marvels. Yet because the ample
and cheap finance feeds mostly into microcredit portfolios, it has at least two downsides. It dulls
the initiative to take savings as an alternative source of funds. And it encourages microfinance
organizations to grow faster than it can safely manage—indeed, drives them to do so, because of
the way competition favors the most aggressive players in the short run. Understand, fast
microcredit growth is not always bad.9 But if there is some maximum amount of microcredit that
a populace can sustainably absorb, the faster that line is crossed, the worse. Recognizing these
risks while accepting that credit for microcredit has its place forces hard practical questions.
9
Gonzalez (2010b).
10
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
How should investors collectively define and enforce Aristotle’s golden mean? If they can define
it in the abstract, can they legislate it in practice, divvying up the limited investment pie among
themselves? Or if moderation cannot be enforced, would the next-best option be to browbeating
certain classes of investors into withdrawing altogether?
To see the complexities, consider first the concern about undermining deposit-taking.
Most MFIs cannot emulate the purity of BRI circa 1990, which as a century-old governmentowned bank was stout enough to resist the World Bank’s repeated offers of credit. Nor should
other MFIs necessarily emulate such purity. Even mature MFIs should diversify across funding
source since each source has its costs and risks. Deposits might plunge in a recession. Equity is
the most pliable, but by the same token most expensive. (And subsidized loans might disappear
if the whims of donors shift.) Accepting that borrowing by MFIs is reasonable in principle, it is
hard to pinpoint the right amount. Perhaps more should go to young MFIs, then taper as they
grow? According to what formula?
As for the second concern about ample finance—that it will cause dangerous credit
expansion, even bubbles—drawing lines is difficult here too, notoriously so. Bubbles are certain
only in retrospect. To ground my thinking about this challenge, my research assistant Paolo
Abarcar and I set out to answer an impertinent question about the microcredit bubbles that
popped in 2008–09 (see chapter 8): Who inflated them? We combed through the annual reports
of the largest MFIs in the four relevant countries.10 In Bosnia, Nicaragua, and Pakistan, it turned
out, foreigners supplied most of the air. And most of the money was from public sources.
Number one in Bosnia was the European Fund for Southeast Europe, a conduit for European
government donors. In Pakistan, the Asian Development Bank loomed over the scene; second
Where one institution, such as the U.S. government’s Overseas Private Investment Corporation, had guaranteed
another’s loan—promising to pay it if the borrowing MFI did not—we attributed the amount to the guarantor.
10
11
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
there was the Pakistan Poverty Alleviation Fund, which passed through a World Bank loan.
Some of the big creditors were private companies that manage funds from both public and
private investors. BlueOrchard, for example, was number one in Nicaragua and number two in
Bosnia. (See Table 1.)
One important message of Table 1 comes from its novelty. Laboring to answer the
question of who inflated the bubbles, I realized: almost no one knew. The data summed here
were incomplete, uncertain in some respects, and at 1–2 years of age when gathered, out of date
next to the tempo of hypergrowth. But they were the best that were publicly available. In the
years before the bubbles burst, hardly any investor saw the big picture because hardly any had
tried. Perhaps intermediaries such as BlueOrchard understood the situation. If so, they seem not
to have advertised it heavily.
12
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
Table 1. Top five creditor/guarantors to top five microfinance institutions with data, four
countries with microcredit crises
Outstanding loans
and guarantees
Creditor/guarantor
Money source
(million $)
Bosnia, end-2008
European Fund for Southeast Europe (EC, Austria,
Denmark, Germany, Switzerland)
BlueOrchard
European Bank for Reconstruction and Development
Instituto de Crédito Oficial, Spain
Hypo-Alpe-Adria Bank
Total, all creditors and guarantors
Public
86
Mixed
Public
Public
Private
57
35
34
26
532
Public
Private
Private
Public
Private
143
104
48
34
32
468
Mixed
Public
Mixed
Public
Private
46
33
28
27
19
326
Public
Public
Private
Private
Public
71
32
8
7
6
131
Morocco, end-2008
Instituto de Crédito Oficial, Spain
Banque Populaire du Maroc
Banque Marocaine du Commerce Extérieur
Agence Française de Développement
Société Générale Marocaine de Banques
Total, all creditors and guarantors
Nicaragua, end-2008
BlueOrchard
Central American Bank for Economic Integration
ProCredit Holding
Financiera Nicaragüense de Inversiones (Germany/KfW)
responsAbility
Total, all creditors and guarantors
Pakistan, end-2007
Asian Development Bank
Pakistan Poverty Alleviation Fund (World Bank)
Domestic money market
Habib Bank, MCB Bank, ABN Amro
U.S. Overseas Private Investment Corporation
Total, all creditors and guarantors
Note: "Mixed" instutions are privately run conduits for mixes of public and private money.
Source: "Who Inflated the Microcredit Bubbles?", blog post, j.mp/9bRASO, March 27, 2010.
13
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
This story should sound familiar: A set of borrowers, microcreditors in this case, are
taking loans from many sources. Total borrowing is expanding rapidly. No one is tracking all
this activity, much less whether the borrowers can reasonably be expected to handle all the debts
they have contracted. The easy credit is hiding the very problems it creates, since unpayable
loans are quickly refinanced with new ones. In other words, the cross-country microcredit
financing scene resembles the within-country microcredit market in some places, with untracked
multiple borrowing creating the risk of overborrowing and bubbles. Chapter 8 cited Herman
Daly’s writing about the need to move from an empty world mentality that treats natural
resources as inexhaustible to a full world one that recognizes limits.11 In short order, the footprint
of microfinance finance swelled in places from empty to full. Not that everyone who would want
microcredit had it; rather, the bottleneck was no longer wholesale finance. In the mid-1990s,
Alex Silva struggled to raise a few million dollars for the first microfinance investment vehicle,
Profund. (See chapter 8.) Now microfinance investment managers are struggling to place the
funds they have on hand.
A credit bureau on investment in MFIs
One response within the microfinance world to the excesses of lending has been to attack the
manifestations. The Smart Campaign, a joint project of CGAP and Accion International’s Center
for Financial Inclusion, has signed up more than 500 MFIs to endorse six principles of
responsible lending: avoidance of over-indebtedness; transparent and responsible pricing; noncoercive collection practices; proper staff behavior; mechanisms for redress of grievances; and
privacy of client data.12 The organizers well understand that nice words do little in themselves.
But they give investors a benchmark with which they can hold MFIs accountable.
11
12
Daly (2005).
smartcampaign.org/about-the-campaign/campaign-mission-a-goals.
14
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
At any rate, the history of financial manias teaches us that a heavy tide of capital will
overtop or sweep away all but the sturdiest embankments. In the United States, the trillion-dollar
build-up to the crisis of 2008 tossed aside ratings agencies and central bankers and economic
prognosticators—supposed agents of restraint—like so much flotsam. Only jurisdictions with the
firmest restraints on lending, such as North Dakota and Canada, held back the tide. Efforts such
as the Smart Campaign, while constructive, are not made of stuff strong enough to fundamentally
address the problem of overeager lending. Something else is needed to attack the problem closer
to its source: a campaign aimed directly at credit for microcredit, with the goal of restraining it.
What should be the demands of such a campaign? How should moderation be defined
and enforced? Within nations, one corrective for overeager lending is the credit bureau. By
analogy, investors in microcredit need at a minimum to establish ways to share information at
high frequency on the financial obligations of MFIs in which they invest. This could happen
informally. In fact, many microfinance investors already demand high-frequency (such as
quarterly) data on the dealings of their investees. This in turn can keep them reasonably abreast
of industry-wide conditions in each country. But if that is the status quo, then improving on it
calls for something more. A credit bureau with information on microcreditors could publish
high-frequency data on investment flows into MFIs (including what they have borrowed
wholesale) and their assets (what they have lent retail). The data could be aggregated to protect
the confidentiality of individual deals. The body could develop indicators of lending growth of
individual MFIs and in regional and national markets. Based on soft standards analogous to the
rule of thumb that mortgage payments should not exceed a third of income, it could issue
warnings of various severity levels. (Think of yellow and red traffic lights.) These external
reference points would help microfinance investment managers resist higher-ups, politicians,
15
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
customers, and citizens who are eager for them to pour more money into microcredit. It would
inform Kiva users about where it would be safest to lend. The body could also gather data
relevant to when credit for microcredit undermines the initiative to enter the savings business. It
could analyze whether a given MFI could realistically obtain permission to take savings; study
the cost of doing taking savings; and compare that cost to that of external capital in order to
gauge the distortion from cheap credit.13
Like ordinary credit bureaus, such a centralized brain for the microcredit investment
business would reduce but not eliminate problems. After all, America’s three credit bureaus did
not stop the mortgage lending bloat. The toughest problem might be imposing the restraint
implied by a serious commitment to savings: would microfinance investors support a body that
advised them to slash their operations, to stop picking the plum MFIs? Perhaps only if they saw
the institution as essential to the industry’s survival.
Public vs. private
An alternative to regulating the sizes of the flows is to regulate who can emit them, favoring
those more apt to act with care. In a 2007 report called Role Reversal, Julie Abrams and Damian
von Stauffenberg argued that public investors ought to exit MFIs when private ones enter. The
job of public investors (which they call International Financial Institutions, or IFIs) is to “go
where the private sector does not yet dare to tread; to assume risks that private capital would find
unacceptable.” Yet public investors often fall down on the job:
Whether top decision-makers are aware of it or not, there are powerful incentives for IFIs to
maximize their microfinance exposure, and to do so by concentrating on the largest and safest
borrowers. Microfinance has acquired such a positive image, that a sizeable exposure in this
sector has become a sign of a IFIs commitment to development. This is reinforced by an IFI’s
need to disburse its microfinance budget each year. Since IFIs are not primarily profit-driven their
success is often defined by the amounts that have been lent. If a budget has been allocated to
microfinance, that budget must be spent—and spending it on a few large loans to top MFIs is far
13
Liliana Rojas-Suarez, Senior Fellow, Center for Global Development, conversation with author, April 30, 2010.
16
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
quicker, cheaper, and less risky than lending to, and nurturing immature institutions.14
On its face, “public should exit when private enters” is a blunt rule with a fuzzy rationale. It is
not obvious why private social investors pursuing that “positive image” should behave more
constructively than public social investors doing so. Private investment funds too feel pressure to
get money out the door and associate with success; many of them are also not primarily profitdriven.
But conversations with industry insiders have persuaded me that the public-private
distinction has teeth. The key is that most private investors are small specialists. Bad calls can
permanently damage their reputations. Such mortal risk focuses the corporate mind. As private
companies with staffs numbering in the dozens rather than thousands, they are much less rulebound, more agile. In contrast, major public investors such as the International Finance
Corporation (the IFC) are muscle-bound generalists. In recent crises, the private investors
seemed quicker to recognize troubles, slow disbursements, and even gently discourage
prospective investors in their funds. For example, in the last, dark days of 2008, when global
financial Armageddon seemed nigh, the IFC and Germany’s KfW joined forces to announce the
Microfinance Liquidity Facility. It was a sort of miniature TARP (Troubled Asset Relief
Program) for the global microfinance industry, meant to prevent a sudden scarcity of capital
from choking sound microlenders. Through leading fund managers such as BlueOrchard and
responsAbility, it would inject up to $500 million into MFIs. It was a smart, swift, and bold
proposal. But by the time the first monies were disbursed, five months later, the fund managers
were struggling with a surplus rather than a deficit. It turned out that they already had more
money than MFIs could absorb. There was no negative capital shock. Yet despite the excess of
14
Abrams and von Stauffenberg (2007), 1.
17
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
liquidity, the Facility created more of it, disbursing $76 million over the rest of 2010.15
Given the dangers of surfeit, and the continuing dominance of public investors, curtailing
the flow of public money into microcredit portfolios would probably make the world a better
place. And it is a practical proposal, in that a relatively small group of actors, including heads of
development banks and parliamentarians holding the purse strings, could make it happen.
Not that the private microfinance investment industry is foible-free. Managers of
microfinance investment funds do not build careers by stashing customers’ cash in money
market accounts. Their eagerness to raise and invest more money can also distort microfinance.
One symbol of that is the Lift Above Poverty Organization (LAPO), an MFI in Nigeria. Von
Stauffenberg, who founded the first microfinance ratings firm, MicroRate, described his
impression of LAPO from visiting it in 2002: “I could see that they were perfectly positioned to
cozy up to donors, but not be financially viable. They had an efficient branch network, making
lots of tiny loans, but a bloated headquarters, with a big office studying women’s issues, social
impacts, and so on. Those were donor concerns. It was well equipped to sing the songs the
donors wanted to hear.” In 2006 MicroRate gave LAPO a grade of β—not spectacular, but
passable on a continent where the pickings for microfinance investors were slim. Among the
weaknesses MicroRate identified were a poor computer system for tracking loans and finances, a
high client drop-out rate (suggesting dissatisfaction), and the taking of savings without a banking
license.16
Over the years, LAPO received grants and loans from many private investors: Deutcshe
Bank, Citigroup, Triple Jump, the Calvert Foundation, Oxfam Novib, Kiva, and the Grameen
15
16
Microfinance Enhancement Facility (2011).
MicroRate (2006).
18
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
Foundation, which gave it an award.17 But then the LAPO story began to unravel. In mid-2009,
MicroRate withdrew its rating of LAPO after learning that the MFI was cooking its books.18
LAPO’s external auditor should have caught that—but perhaps overlooked it because he was,
improperly, a close relative of a board member.19 LAPO’s presumably uncomfortable funders
commissioned a fresh analysis in December 2009 from MicroRate’s European competitor, Planet
Rating. Instead if dispelling the cloud of doubt, Planet gave LAPO a harsh C+. To the list of
problems it added LAPO’s deceptively high interest rate of 125.9 percent per year and some
large and suspicious loans to sister organizations.20 That same month, the bloggers at GiveWell,
who ask tough questions of charities, researched LAPO as the leading recipient of Kiva funds.
From online sources, they learned that LAPO profits were a high 25 percent of revenue (the
average profit rate for Kiva-linked MFIs was zero or less); that 49 percent of LAPO’s customers
quit each year; and that some faced hurdles to getting their savings back from LAPO.21
Yet private investors seemed reluctant to let go of LAPO. The Swiss investment fund
responsAbility lent it $1 million in September 2009, followed by BlueOrchard with $2 million in
November.22 Kiva retained LAPO as a partner until an unfavorable story appeared in the New
York Times the following April.23 Calvert appears to have dropped it around then too.24 The next
month, the foundation of Klaus and Hilde Schwab, creators of the “Davos” World Economic
17
MicroRate (2007)
MicroRate (2009).
19
LAPO (2008), 2, 4; Planet Rating (2009), 7.
20
Planet Rating (2009), 6. As noted in the section on forced savings in chapter 5, LAPO cut its headline interest rate
in 2009—but then doubled its forced savings requirement from 10 to 20 percent of the loan, resulting in a net
increase in the cost of its credit.
21
Elie Hassenfeld, “LAPO (Kiva Partner) and Financial vs.Social Success,” GiveWell, December 9, 2009; Kiva,
“Lift Above Poverty Organization (LAPO) Nigeria,” j.mp/koQtFK, viewed April 27, 2011.
22
CGAP, Microfinance Dealbook, on MicroCapital.org, reports for third and fourth quarters, 2009.
23
MacFarquhar (2010); Kiva, op. cit. note 21.
24
Ashwini Narayanan, “The Truth about Microplace,” PayPal blog, viewed April 28, 2011.
18
19
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
Forum, gave LAPO an award for Social Entrepreneurship.25
To be fair to microfinance investors, doing business with young organizations in
developing countries means getting one’s hands dirty. No MFI is perfect, so if one is looking to
invest, one must make tough calls, and sometimes they will look bad in hindsight. LAPO’s may
even operate cleanly relative to the norm in Nigeria, where the so-called microfinance industry is
currently engulfed in a crisis of weak oversight and embezzlement of deposits (see below). But
even if LAPO’s combination of rickety books, unlicensed deposit-taking, and high interest,
profits, and turnover make it an outlier globally, extreme cases make for illuminating tests. Why
was LAPO worthy of support before the New York Times article and less so after, even though
most of what the article revealed had been common knowledge among investors for years—or
should have been? As GiveWell, wrote:
LAPO has been funded and celebrated by many of the big names in microfinance, yet for years
there have been many causes for concern about its social (as opposed to financial) performance.
From what we’ve seen, it is not clear that these concerns have been on the radar screen of
LAPO’s funders and partners.26
The willingness to invest in an MFI despite signs of poor service suggests that pressure to invest
is distorting decisions, overriding social mission. If there were less money looking for a home,
perhaps there would be fewer tough calls to make. And perhaps there would be fewer LAPO’s,
organizations skillfully crafted to attract foreign funds.
If the microcredit investment industry cannot be run in a way that minimizes harm to the
goals of responsible lending, safe deposit-taking, and healthy institutional growth then probably
it should be shut down altogether, save for a catalytic role in developing new MFIs through seed
capital and training grants. Because of the dangers of aggressive lending, too little direct
25
Schwab Foundation (2011), 50.
Holden Karnofsky, “LAPO: Case Study on Due Diligence by Microfinance Funders,” GiveWell, October 13,
2010.
26
20
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
financing of microcredit portfolios is better than too much. A fundamental problem here is that
the evidence on the overall impact of microcredit on poverty and freedom is ambiguous. If it is
this hard to assure that such investment does more good than harm, that suggests the movement
is spending too much time barking up this tree. Helping microfinance play to its strength,
building lasting institutions, calls for less investment, not more.
Deliberately seeking savings
The lives of the poor are full of risk. Their incomes fluctuate sporadically by day and season.
They are more prone to injury and illness, yet more dependent on physical health for their
livelihoods. If the chief financial problem of the poor is managing unpredictability, then
microinsurance seems tailored to help. Exploratory efforts to insure the poor should be supported
and successes should be applauded. Going by the history of today’s rich countries, life insurance
is the most promising avenue for take-off. The prospects are perhaps best in South Asia where,
just as with microcredit, skilled staff are cheapest relative to the incomes of those to be served.
However, as we saw in chapters 4 and 5, insurance is inherently more complex than credit and
savings, which cuts against the microfinance business’s imperative to streamline. On balance,
microinsurance for the billions appears a less practical ideal than microsavings for the billions.
Savings is a conceptually simpler service, with much going for it. Shifting toward savings
and away from credit should help microfinance perform better on all three of the senses of
success considered in this book. A randomized trial found savings reducing poverty. Savings, if
it is safe, does not impinge like debt on freedom. And MFIs enrich the local financial fabric most
when they interface with the poor bidirectionally, taking savings and giving credit. Experience
and common sense say that the poorest are more willing to save than to shoulder the risk of
credit. Recall that BRI in Indonesia has twelve times as many savers below the poverty line as
21
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
borrowers.27 Meanwhile, as we saw in chapter 2, savings can do almost anything credit can.
People can save to start a business, pay tuition, finance a funeral.
To achieve its full potential, savings needs to be offered in a variety of forms—perhaps
including ones that haven’t been invented yet. In principle, accounts can be completely liquid,
for maximum flexibility, though in practice these are costly to administer. Commitment savings
better approximate the discipline and rhythmic efficiency of loans. Exploration beyond those
standard product types, deserves the same energy historically poured into elaborating and
refining microcredit. An interesting credit-savings hybrid is Stuart Rutherford’s “P9,” which he
is piloting through SafeSave’s rural sister in Bangladesh, Shohoz Shonchoy. It is designed to
eliminate two barriers to saving: lack of discipline and lack of periodic lump sums of income,
such as a paycheck, from which to set aside money. P9 morphs see-saw–like from credit to
savings. A customer starts with a zero-interest loan of 2,000 taka ($28), of which the bank
disburses just two-thirds, putting the rest in a zero-interest savings account. Despite having
received less than 2,000, the customer pays back that much so that she ends up with a net savings
balance. She repays on a schedule of her choosing. She then repeats with optionally larger
amounts, so that after a typical seven cycles, savings exceed her loan balance. Once she reaches
20,000 taka in savings, she can withdraw it all, continue to “borrow to save,” or just save
conventionally, now with interest.28
Those who would promote microsavings face two major challenges: assuring safety of
savings and controlling costs. In informal, small-group savings arrangements, the first problem,
building trust, is solved through witness. In a Village Savings and Loan Association of 30
women, everyone can watch as the three key holders secure the group’s lock box.
27
28
Johnston and Morduch (2007), 29.
Stuart Rutherford, “Product rules,” j.mp/epwJlh, viewed April 24, 2010.
22
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
But when clients are too numerous for direct witness, government supervisors are usually
needed. It sounds like a simple step, but when an external body assumes responsibility for the
safety of savings at an MFI, it leads to a massive departure from credit-only microfinance.
Regulators (who write rules) and supervisors (who monitor compliance) take an interest not only
in the savings side of the operation but the previously ignorable credit side too, since the lending
puts the deposits at risk. Overseers must devise and enforce formulas to govern MFI behavior,
such as that for every ten dollars in outstanding microloans, the MFI have one dollar on hand in
cash or some other ultrasafe form, ready to absorb losses on the loan portfolio and protect
deposits (meaning a “capital adequacy ratio” of 10 percent). They may regulate the lending to
help assure that it is above-board and prudent, for example, by requiring that the banks keep files
with specified documentation on each borrower. They may impose constraints on the ownership
and board composition of the MFI to prevent crony capitalism (overly “friendly” lending to
parties with undue influence), and to assure that if the MFI needs to call in more capital, owners
will have deep enough pockets to comply.29
This is the stuff of conventional banking regulation. Bringing it to microfinance requires
surmounting several challenges. One is that enforcing and complying with all these rules costs
the MFIs and the government money. For MFIs, collecting the required documentation and filing
the required reports drives up the cost of taking savings. In an authoritative review of regulatory
issues in microfinance, Robert Christen, Tim Lyman, and Rich Rosenberg write that it is not
unusual for compliance to cost 5 percent of assets in the first year and 1 percent or more per year
thereafter. Likewise, especially in poor countries where government agencies are chronically
underfunded, supervisory agencies may lack to the staff to monitor all of a country’s MFIs and
other deposit-taking institutions. And because most MFIs are too small to pose a systemic risk—
29
Christen, Lyman, and Rosenberg (2003).
23
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
too small to undermine confidence in the banking system generally—MFIs are a low priority.
Recognizing such limits, Christen, Lyman, and Rosenberg point to a trade-off: only allow a few
MFIs to take savings; or allow more to do so, bringing financial services to more people, but
under little or no supervision. To the extent that supervisors opt for the latter, they should at least
have MFIs make sure customers understand that no supervisory guardian angel is watching.30
The other challenge in keeping savings safe is adapting conventional regulation in order
to suit microfinance. While some principles ought to carry over—poor savers deserve the same
protections as rich ones when it comes to capital adequacy—the job is still easily botched. Some
traditional rules can vitiate the microcredit approach, by, say, requiring all loans to be backed by
collateral, or by viewing a non-profit MFI that would own the majority of its for-profit offspring
as a crony capitalist.31 And if strict rules can undo microsavings, so can loose ones. In 2007–08,
the central bank of Nigeria created defined a new type of financial institution, the Microfinance
Bank, and issued an absurd 800 licenses to start them. The banks could do both savings and
loans. The result was unsurprising: 800 little institutions, hardly supervised, taking depositors’
and investors’ money, growing fast, making sloppy loans, paying rich salaries to top
officials…and running up records of fraud, default, bank runs, and failure. At this writing, the
central bank has revoked more than 100 licenses.32
Nigeria’s experience shows why proper regulation makes it rather hard to enter the
microsavings business. This, at least in effect, is why many MFIs have entered lending first to
build scale, competence, and reputation, then branched into savings. On the other hand, among
the exemplars of microsavings, the largest and smallest, BRI’s unit desa system and Rutherford’s
SafeSave, both took savings from the start and so far have rewarded their clients’ trust. Many of
30
Ibid., 19, 28.
Ibid.
32
[Rozas et al.]; Central Bank of Nigeria (2011).
31
24
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
ProCredit’s banks took savings from birth or moved into it quickly, exploiting the financial
muscle of their parent organization. At any rate, accepting the credit-then-savings path as
reasonable, it follows that at any given time not every MFI should do microsavings.
In fact the reverse follows too by a sort of doctrine of comparative advantage: if MFIs are
not all suited for savings, then not every organization that does microsavings needs to be an MFI.
Institutions of different form, with a comparative advantage in reliability, can also do the job:
VLSAs; credit cooperatives and their more formal and regulated cousins, credit unions; and of
course established savings banks, public and private. If the end is the expansion of microsavings,
promoters and regulators should be ecumenical about the means.
The technological frontier
Along with keeping savings safe, a primary task in making microsavings work is controlling
cost. A careful study by the Inter-American Development Bank of MFIs in Latin America found
that for microsavings accounts, defined as those under $100, holding $1 in deposits cost an
astonishing $2 per year, mainly in bank tellers’ time handling tiny deposits and withdrawals.
Clearly the economics of banking impose limits on how small the accounts and how poor the
people that can be served. Happily, the situation is not as bleak as this statistic suggests. Just as
microcredit is most expensive in Latin America, so should we expect microsavings to be. The
economics are probably better elsewhere. Meanwhile, despite the high costs, the Latin MFIs
accepted the small accounts, and for a set of interesting reasons: a sense of mission to serve the
poor, backed by cross-subsidies from larger, profitable accounts; an expectation that many
balances would rise over time; and use of the savings relationship as a platform to sell insurance,
money transfers, and credit.33
33
Maisch, Soria, and Westley (2006).
25
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
Nevertheless, cost remains an impediment. The great hope for reducing that cost lies in
modern technology. Actually, the flavors of microcredit that started the microfinance
revolution—solidarity and village banking, individual microcredit—are what economists call
technological breakthroughs They were fresh ways to extract more value from a given amount of
labor and capital, even if they were low-tech in the everyday sense of the word, involving
meeting in person, paying in cash, keeping records on paper. Since then, microfinance has not
changed so much as a retail product. SKS in India does group microcredit much as Muhammad
Yunus and his students invented it (albeit with a computerized back office). Compartamos in
Mexico does village banking more or less as John Hatch and FINCA refined it. The hope now is
that the new possibilities for connecting people and transmitting information opened up by
modern technology will carry over into microfinance.
The future of microfinance appears to be not merely the past with a high-tech add-on—
group meetings with smart phones—but something or some things radically different. Look at
what has already happened. In the mid-2000’s, Brazil used satellite links and barcode readers to
extend its banking system into all of the country’s 5,561 municipalities, including 2,300 that had
never been banked before. Post offices and corner stores now operate as “banking
correspondents,” agents who can handle transactions on behalf of regular banks far away. They
handle the conversion between paper and electronic money, so that customers can, for instance,
arrive with cash and pay a water bill, with the payment then being transmitted electronically. The
system has handled trillions of dollars in payments.34 In South Africa and Namibia, a company
called Net1 delivers government welfare payments to nearly 4 million people by charging their
smart cards. Cardholders can convert balances to cash at any store with the appropriate point of
Terence Gallagher, Consultant, presentation at “Expanding Financial Services to the Poor: The Role of ITC,”
International Finance Corporation, June 9, 2006.
34
26
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
sale (POS) card reader. The cards look like ordinary credit cards and the machines that read them
look like ordinary card readers. But inside, the technology is more advanced. For the cards and
readers are designed to operate in decentralized fashion to accommodate unreliable power and
communications infrastructure. They contain chips that store encrypted transaction histories of
their owners and the owners of other cards or readers that they have recently touched, allowing
them to pass around and back up transaction histories like ants passing chemical signals. When
the readers do connect by phone to central computers, they synchronize everything they have.
And because the cards are computers, they can, when passed through readers, provide extra
services. They can extend a loan on the fly, based on on-card data about the card holder’s history
of welfare payments and servicing of past loans.35
The greatest potential for technological revolution in microfinance comes from one
stupendous fact: some 5.3 billion people now tote mobile phones. And the community of the
connected is growing fast even in the poorest countries.36 Put otherwise, there are now 5.3 billion
people with globally networked computers in their pockets. What can they do with those besides
talk and text? Access financial services, for one.
In fact, the most successful phone-based financial service for the poor so far was created
by a phone company. Called M-PESA, it was launched in 2007 by Kenya’s Safaricom with the
help of a £1 million challenge grant from the U.K. Department for International Development.
Interestingly, it was born out of the microfinance movement, for it did begin with the idea of
doing microcredit transactions by phone. But users in pilot tests began doing something else with
it: sending money to each other. As Safaricom developed the system, it realized that the “killer
application” for M-PESA was not doing microcredit slightly differently—not patching a 1990s
35
David Schwarzbach, Vice President, Business Development, Net1 UEPS Technologies, Palo Alto, California,
presentation at Center for Global Development, June 14, 2006, cgdev.org/content/calendar/detail/8069.
36
ITU (2011).
27
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
communications technology onto a 1970s financial technology—but sending money home. In
Kenya, many rural families send a husband or son to Nairobi to work and support the family
from afar. Before M-PESA, physical transport of cash was costly and dangerous. One could
spend a day or so taking it home oneself. One could get robbed on the way. One could pay
informal money carriers, again exposing oneself to robbery as well as fraud.37 M-PESA offered a
radically safer, more reliable way to send money over long distances. In just three years MPESA reached more than 9 million, or 40 percent, of Kenyan adults. It now handles more
transactions than Western Union.38
All this high technology might dazzle you into thinking that poor countries are
leapfrogging the rich into the age of electronic money, leaving cash behind. Quite the contrary.
The first thing that Kenyans usually want to do when they receive electronic money is encash it.
This they do by visiting any of the 17,000 M-PESA shops which, like Western Union stores,
convert between the old and new forms of money for a fee.39 The shops are businesses in
themselves, run by individual entrepreneurs in agreement with Safaricom. Almost all the shops I
visited during a trip in 2010 were run by women. For these business people, providing the ondemand conversion between paper and electronic money takes work and involves risk. They
must staff their shops, project cash demand, keep enough cash on hand, and transport it between
the shops and the bank at the risk of robbery. In return, these entrepreneurs keep 70–80 percent
of the commissions, the rest going to Safaricom.40 As that split suggests, the M-PESA
shopkeepers, and not the phones, are the heart of M-PESA. The phones are the skin.
But the phones do hold the system together; and understanding how gets to the core departure
37
Hughes and Lonie (2007)
Mas and Radcliffe (2010).
39
Ibid., 1.
40
Eijkman, Kendall, and Mas (2010), 3.
38
28
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
from traditional microcredit. For one, the phones allow the managers behind M-PESA to monitor
transactions in real time anticipate cash demand efficiently.41 As well, the phones make MPESA’s e-money seem real and trustworthy. The instant a customer deposits cash into his phone
account, Safaricom verifies his new balance with a text message, which stays in his phone’s
memory. More generally, the phones let customers hold Safaricom and its agents accountable for
promises of service to a degree impossible in informal ways of sending money. When someone
sends money home, both he and the recipient get text messages, which prove incontrovertibly
that Safaricom is obliged to surrender the funds to the recipient upon request. That accountability
in turn allows the delegation and professionalization of cash transport. Before M-PESA, village
women might have gone individually, by foot or by bus, to the nearest market town to pick up
cash sent home by husbands. Now an M-PESA agent can do it for all of them, all at once, saving
time.42 When I visited Kenya to see M-PESA, my fellow travelers and I were taken to the market
at the crossroads in the Holo, not far from Lake Victoria. Before M-PESA, we were told, people
trekked to the Kisumu, on the shores of the Lake, to get their cash—and spent much of the cash
in the market there. Now the cash comes to them through M-PESA, and they spend it locally.
And so the Holo market is bustling as it once was not.43 Ironically, a major impact of the new
mobile money technology has been increased access to the old mobile money technology, cash.
M-PESA shows how information technology can create new efficiencies and empower
clients. In M-PESA, we see an alternative to the power relationships of traditional microcredit, in
which bank employees lean on clients to lean on each other (in group credit), and in which the
ultimate sanction is the loss of future access to loans (in individual and group credit). With
For more on the management structure behind M-PESA, see blog post “Make New Media of Exchange, But Keep
the Old,” j.mp/c3tbXx, and
42
Eijkman, Kendall, and Mas (2010).
43
Frederik Eijkman, Co-founder, PEP Intermedius, Kisumu, Kenya, conversation with author, May 18, 2010.
41
29
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
mobile-phone based payments, the relationship is less hierarchical. Just as important, technology
makes it economical to atomize the client-company relationship. In contrast with a microloan,
which can be viewed as a large package of transactions, mostly repayments, spread over time, in
mobile money, each transaction of a dollar so, with fees measured in pennies, can stand on its
own. Such tariffs encourage clients to economize on transactions while guaranteeing the provider
a profit at every step. Ignacio Mas, who jumped from the world’s largest mobile phone company,
Vodafone, to the world’s largest philanthropy, the Bill and Melinda Gates Foundation, explains
that charging by the transaction “is analogous to prepaid airtime for mobile operators: a card
bought is profit booked.”44 This is one reason that the Gates Foundation is investing heavily in
the high-tech route to savings.
I suspect that we are on the cusp of a technological revolution in microfinance. Mobile
payments look to me like a kind of infrastructure, like electricity supply and the Internet. It
connects people in a radically new way and creates possibilities that will take years for human
ingenuity to discover. It will disrupt every field that it touches. In May 2010, while I was in
Kenya, Safaricom launched a partnership with Kenya’s dominant MFI, Equity Bank. With a few
key presses, M-PESA users can now move electronic money into an Equity savings account that
pays interest. They can apply to get automatic loans too, just as with Net1’s system. And they
can buy personal accident insurance.
Overall, as seen in Brazil and Kenya, technology is rearranging of the economics of
banking the poor, centralizing core banking functions while decentralizing the interface to the
customer. The new approach splits retail from wholesale while keeping them linked via wires
and radio signals. The retailers are local shopkeepers who provide the interface between paper
and electronic money. They substitute for the loan officers of traditional MFIs. But they are not
44
Mas (2009), 57.
30
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
banks. They do not hold clients’ money. That job is performed by regulated institutions behind
the scenes. Recall how one major impediment to safe savings is the limited capacity of
governments to supervise banks. Communications technology is accommodating this limitation
in a new way, making it more economical to link the poor directly to traditional, supervised
banks. The digital interface of a card or a phone doesn’t make the human interface obsolete;
rather, as with M-PESA, it provides a new way to delegate customer service to people who can
do it more cheaply than brick-and-mortar banks can do.
Coming full circle
I began this book with two opposing stories. One was about Murshida, who climbed out of
poverty on a ladder of microcredit The other was about Razia, who slipped down a rung after
taking loans. I did so to expose how storytelling forms the public image of microfinance, and to
make the case for serious research. We need good research not to move beyond thinking in
stories, but to test stories, to inform us about which are representative. That is as close as we can
come to the truth about something as diverse as the microfinance experiences of 150 million
people.
Though I have examined services other than credit and notions of success other than
escape from poverty, there is no denying that the grain of sand that seeded the imperfect pearl of
this book is the common belief that microcredit cuts poverty. As a child of bitterly divorced
parents, it goes against my nature to choose sides. I see the world in grays and it is those who see
it in black and white, whatever side they choose, who most stir my ire. So I could never dismiss
traditional microcredit as nothing more than hype. But it is hard for me to defend it as a great
way for aid agencies, philanthropists, and social investors to help poor people. Consider:

While microcredit gives people a new option to manage their complex and unpredictable
31
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
financial lives and helps some build businesses, it also leaves some worse off and has a
potentially addictive character. On the creditor side, it often pays to keep lending to clients in
a continual cycle. On the borrower side, the need to pay off one loan often leads people to
take out another. Overlending and overborrowing becomes more likely as creditors multiply
and compete, often by lending to the same clients.

Although good studies show microsavings and microcredit stimulating microenterprise, those
on microcredit have so far found no impact on poverty.

Qualitative studies by people who immersed themselves in a village for a month or year
corroborate this ambivalence. Some women find liberation in doing financial business in
public. Others find entrapment in the peer pressure.

Enthusiastic flows of money into lending are inherently dangerous. They can reward overlyrapid lending and, in competitive markets, nearly force it through a vicious cycle in which
each lender strives to keep up with its peers. The microfinance movement has compiled a
rather long list of disasters in recent years: Bosnia, India, Morocco, Nicaragua, Nigeria,
Pakistan. Probably none will be fatal, but together they point to a deep problem of instability.
Credit is undoubtedly useful in moderation, as a way for people to discipline themselves
into setting aside money for big purchases. It becomes dangerous when it is pushed too hard.
And it is here that the mythology that has grown up around microfinance is not just deceptive but
destructive. How much support for microcredit is too much? Incomplete evidence cannot support
a certain answer. But choices today must be made on the evidence available today. To the
practical question of whether social investors ought to keep pouring billions of dollars per year
into microcredit, I say no. Seed money for start-up MFIs is one thing; large-scale, submarket
financing of microcredit portfolios is another. Indeed, the history of microfinance reviewed in
32
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
chapter 4 shows that small amounts of aid, intelligently placed were invaluable to the
microfinance movement. The Ford Foundation, and the U.N. International Fund for Agricultural
Development (IFAD) gave crucial early support to the Grameen project. The U.S. Agency for
International Development worked behind the scenes in Indonesia and Bolivia, as did Germany’s
Gesellschaft für Technische Zusammenarbeit in the India on the self-help group program. Since
such flows currently account for the majority of money going into microfinance, it follows that
finance for microfinance should go down. The priority should not be building giant machines for
indebting the poor.
The priority should be to create balanced, self-sufficient institutions that offer credit in
moderation, that help people save and move money safely, and that push the envelope of
practicality on insurance. While such a path may superficially contradict the credit-centered
mythology advanced by some of the founders of microfinance, it is in fact the truest realization
of their vision: businesses serving the bottom of the pyramid, giving millions of poor people
more leverage over their difficult financial circumstances. Nimble social investors have helped
build such institutions with money and advice, and can do more. But the scale of funding needed
is an order of magnitude less than what is seen today in microcredit. The U.K. government
helped bring M-PESA into being with a grant of just £1 million.
At the end of day, I cannot dismiss Razia’s story. Nor can I dismiss the story of Eva
Yanet Hernández Caballero, who Compartamos featured on its web site until her knitting
business unraveled and she began missing payments on her loans with triple-digit interest rates.45
I cannot dismiss the story of Jahanara, the microcredit borrower and moneylender who boasted
“that she had broken many houses when members could not pay.”46 I cannot dismiss the story of
45
46
Epstein and Smith (2007).
Karim (2008), 23. See chapter 7.
33
Roodman microfinance book. Chapter 9. DRAFT. Not for citation or quotation.
5/29/2016
families in Andhra Pradesh who lost wives or fathers to suicide after falling into debt—debt that
included microcredit.47 I cannot dismiss these stories, that is, as immaterial to the morality of
favoring credit.
But neither can I dismiss the manifest hunger of poor people for reliable tools to manage
their money; nor the extraordinary success of some microfinance institutions in creating and
serving this market over the last third of a century. The best way forward is to celebrate what is
good in this achievement and build on it. The success of the microfinance movement to date has
proven the viability of businesslike provision of financial services to the poor. The need now is
to diversify more aggressively beyond microcredit, especially into microsavings. If savings,
money transfers, and insurance can also be done through institutional forms less associated with
traditional microcredit, let them be done so.
Over the next third of a century, a global industry could arise to deliver to a billion or
more poor people the tools they need to master the vicissitudes of their financial lives. Better
banking will no more end the poverty than more clinics a more schools or more roads ever have.
Most poverty reduction has arisen from profound processes of economic transformation nearly
impossible to push from the outside. And building businesses and industries to meet their
demand is in fact a contribution to transformational development, however incremental. As it did
so often over the last third of a century, judicious outside support can catalyze the innovations
needed, innovations that can help all the world’s poor manage their wealth.
47
E.g., see Biswas (2010) and Lee and David (2010).
34